If you want to have a good financial future and not be scared of money anymore (as many people are – if you’ve ever ignored your bank statement because you just don’t want to see what’s left and what’s gone, you’ll understand), you’ll need a budget. That’s it. That’s the advice. A budget.
Yet that doesn’t really solve any problems, does it? Being told that you need a budget is only the start because you’ll then have to go on to make that budget and not just rattle it off quickly on a scrap of paper, hoping it all adds up, but really putting time and effort into it to ensure it does what it’s meant to do (which is to save you money and help you become more financially secure).
You’ll find a ton of lists that tell you how to make a budget and what to put in it, and they’re incredibly useful, especially if you just don’t know where to start. However, this list is going to be a little different – this list is going to talk about the things you might forget to include in your budget, but that could make a big difference in your results and how accurate it all is. So let’s get started; here are some of the things that you might forget to include in your budget (but shouldn’t).
Forgetting To Distinguish Between Needs And Wants
One of the biggest mistakes people make when they’re making a budget is forgetting to make a distinction between their needs and their wants. Although it might seem obvious, the truth is that the line between these two things can definitely become blurred (or even disappear altogether), and even if that doesn’t seem like such a terrible thing initially, when you realise the result is overspending and financial issues because of that overspending, you’ll see why we’ve included it on this list.
So, understanding your needs is vital if you want to make a realistic budget, and we’ll start there. Think about all the things you have to pay for each month (whether the amount changes, as it will with your food shopping, or stays the same as it will with your rent or the pension amount your financial adviser leads worked out for you), and they need to go in the ‘needs’ column of your budget. These are the things that you can’t go without paying, and they have to be priorities. The reason to put these on the budget first is that the money to pay for them needs to be ring-fenced, and it’s only once you’ve accounted for all these costs that you’ll know what’s left to play with.
Your wants might feel just as important as your needs, but they’re actually non-essential. So you might want to go out for a nice meal or get a takeaway, but you don’t need to do that. You might want to buy a new designer watch, but you don’t have to do that. Once you put it like that, the difference becomes a lot easier to see, and making your budget becomes a lot easier to do. Of course, we’re not saying you’ll never get to have that watch or enjoy that takeaway – it’s just that the essentials have to be dealt with first, and if there’s funds left over, then you can work on your wants.
Irregular Expenses
Budgeting isn’t just about monthly bills and those well-known and recognised regular expenses you have to pay for; it’s also about making sure you’re prepared and ready for any irregular expenses – but they’re often forgotten about because they’re not something you have to think about too often in your everyday life.
These are things that just crop up from time to time and that most people forget even exist until they’re shocked that their bank balance is a lot lighter than they were expecting it to be. It could be an annual car insurance premium, for example, a subscription for something you thought you’d cancelled, or perhaps something unexpected but vital like a car repair or spending money for a holiday. In other words, they’re not things you’ll have budgeted for on your monthly outgoings list because they’re not monthly outgoings, but that doesn’t mean they’re not going to affect you – in fact, because they can be a surprise, they might affect you even more than anything else.
The best thing to do is to look back at the past year and write down any of these expenses and how much they cost. It’s true that this year might be different – some of them won’t be a problem, and there might be others that come about that you hadn’t thought about, but this will still give you a fair idea of what costs you might incur. Once you’ve got the total, divide it by 12 and then put that number into your monthly outgoings list – you’ll have a much more accurate budget, and you’ll be reminded of what you might have to pay for in the future.
Contingencies
When you’re making your budget, you’ll look at your income and your expected outgoings, and ideally – after what you’ve just read – you’ll think about your more irregular expenses as well. But just thinking about them isn’t going to be enough if something happens that you need to pay out for, and that’s why you’ll also need to include some kind of contingency fund or emergency fund in your budget as well – yet as important at that is, it’s so easily and so often forgotten. You’ll probably have done it yourself; you’ll be rolling along quite merrily, and then something urgent happens that needs some money thrown at it, and all of a sudden, you’re in financial difficulty. The reason? You didn’t budget for a contingency fund.
When you put even a little money into an emergency fund every month, you’ll have a handy financial cushion to help you if you need it. It could be anything from car trouble to emergency home repairs to paying a vet when your beloved pet is unwell or has an accident – and much more besides. If your fridge were to give up the ghost tomorrow, would you be able to buy a new one right away? You would if you budgeted for an emergency fund, so make sure you do.
Going Back To It
You’ve completed that task of writing your budget, and you’re sure – and you’ve double-checked – that you’ve remembered everything. You’re set. You can go about your life knowing that you’re saving where you can, paying for the essentials, and, ideally, that you’ve got a useful contingency fund just in case you might need it one day (and if you don’t, then it can be a great extra savings account – just don’t keep dipping into it for non-emergences or you might not have enough when you really need it).
Or can you?
Because what if something changes? What if your rent goes up or you pay off a debt and have some extra money each month? What if the one-off cost you thought you needed to pay becomes a much more long-term issue? The fact is, as much hard work as you might put into your budget, there’s always the potential that it might have to change, and you’ll need to stay on top of that and make adjustments where and when necessary.
If you just leave things in your budget as they are, even when your circumstances have changed, you might not have enough money to cover your essentials anymore. Or you might have to use your emergency fund sooner than you ever expected. At the very least, your budget will be out of sync with your real life, so it’ll essentially be useless.
Cutting Back On Your Spending
Your budget isn’t magical, even if all those numbers might make it look like a spell of some sort! In other words, once you’ve worked out your budget, you can’t just expect things to fall into place – if that budget tells you you need to save money or stop spending or at least cut back on some non-essentials items so you can afford your essential ones more easily and be less stressed in life, then you’ll need to be the one to do that; you’ll have to work out how to stop buying things or spend less on various items.
That’s why it’s so good to start really tracking your expenses even after you’ve made your budget. For one thing, you’ll soon know whether you got your budget right or not (and you can fix any errors), and you’ll also know when any changes occur sooner rather than later, and that’s beneficial as well.
But tracking your expenses will also help you stop spending so much when you know you need to cut back because your budget tells you so. It’s easy to spend money, but when your budget is fixed in your mind, and you know precisely what you can and can’t spend, the motivation for saving will be a lot easier to find.
This is a collaborative post
